Articles / Alternative Dispute Resolution
Enforcing an Award Vacated by a Court in the Country in which the Award was Entered:
The case Corporación Mexicana De Mantenimiento Integral v Pemex‐Exploración Y Producción (“Pemex”), decided by the United States Court of Appeals for the Second Circuit in August, reached the extraordinarily unusual conclusion that an arbitration award shall be enforced by US courts even though the award was vacated by a court sitting in the country of the arbitration’s seat.
For those not conversant with the lexicon and priority of laws of international arbitration, the “seat” of the arbitration is the official site or place where the arbitration is deemed to occur. The law of the seat governs the conduct and process of the arbitration. Additionally, it also generally governs the validity and enforceability of the award. In other words, if a court in the country where an arbitration is seated vacates an award, that award is generally not enforceable in other countries. More specifically, under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), the Federal Arbitration Act (“FAA”), and most countries’ arbitration acts, arbitral awards are to be enforced unless one of a very small number and very narrowly defined exceptions exist. One of those exceptions is when the award “has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.” [New York Convention Article V(1)(e)] .
In Pemex, the arbitration was seated in Mexico, and following the entry of an award by the arbitrators a Mexican court set aside and vacated the award. Thus, under the New York Convention and the FAA, there was no requirement that the US courts enforce the award. Moreover, strong US law exists holding that US Courts should refuse to enforce awards vacated by a court in the country in which the arbitration was seated. Nonetheless, the United States District Court Southern District Court of New York ruled that the Pemex arbitration award be enforced in the US, and the Second Circuit affirmed that decision.
Background: The Pemex case concerned a 1997 contract wherein Corporación Mexicana was to construct an oil platform for Pemex. The actual construction was to occur in Mexico, and the country chosen for the seat of arbitration in the event of disputes was Mexico. Difficulties arose, and a new contract was formed in 2003. Both the 1997 and 2003 contracts contained “virtually‐identical arbitration” provisions – both naming Mexico as the seat for arbitration of disputes.
In 2004, notwithstanding the new 2003 contract, after the oil platform was 94% complete, Pemex seized the platform, ejected Corporación Mexicana from the job-site, and rescinded the contract. The procedural history from that point forward becomes both complex and convoluted. For the purposes of this Newsletter, what is important is that an arbitration occurred and a US$300 million award was entered in favor of Corporación Mexicana and against Pemex. Corporación Mexicana thereupon sought to enforce the award against assets in the US, and Pemex simultaneously sought to annul or vacate the award in Mexico. Pemex succeeded in vacating the award in Mexico, and then sought to block enforcement in the US claiming the exception to enforcement noted above.
As noted, the US District Court for the Southern District of NY ruled that the arbitration award should be enforced and the Mexican court’s judgment vacating that award ignored, and the Court of Appeals for the Second Circuit agreed. The reasoning: “giving effect to the subsequent nullification of the award in Mexico would run counter to United States public policy and would (in the operative phrasing) be ‘repugnant to fundamental notions of what is decent and just’ in this country.”
To reach its conclusion, the Appellate Court reviewed the US law applicable to enforcing foreign judgments generally, and the New York Convention and the Inter‐American Convention on International Commercial Arbitration (the “Panama Convention”) specifically. The Appellate Court initially determined that a very strong bias exists in US law in favor of enforcing foreign court judgments (in this case, the judgment of the Mexican court vacating the arbitration award). However, it concluded that US law does not requireenforcement, and exceptions to the general rule exist both under US law generally and the New York Convention and Panama Convention specifically.
“Although courts in this country have long recognized the principles of international comity and have advocated them in order to promote cooperation and reciprocity with foreign lands, comity remains a rule of ‘practice, convenience, and expediency,’ rather than of law.” [citation omitted] “When construing a statute, the doctrine of international comity is best understood as a guide where the issues to be resolved are entangled in international relations.” [citation omitted]
Accordingly, a final judgment obtained through sound procedures in a foreign country is generally conclusive . . . unless . . . enforcement of the judgment would offend the public policy of the state in which enforcement is sought.” [citation omitted] “A judgment is unenforceable as against public policy to the extent that it is ‘repugnant to fundamental notions of what is decent and just in the State wherein enforcement is sought.’” [citation omitted]; “Nevertheless, ‘courts will not extend comity to foreign proceedings when doing so would be contrary to the policies or prejudicial to the interests of the United States.’” [citation omitted]
The public policy exception does not swallow the rule: “[t]he standard is high, and infrequently met”; “a judgment that ‘tends clearly’ to undermine the public interest, the public confidence in the administration of the law, or security for individual rights of personal liberty or of private property is against public policy.” [citation omitted]. The exception accommodates uneasily two competing (and equally important) principles: [i] “the goals of comity and res judicata that underlie the doctrine of recognition and enforcement of foreign judgments” and [ii] “fairness to litigants.” [citation omitted]
Having identified the public policy exception to the general rule of comity, the Court next determined whether such exception was applicable to the Pemex case. It concluded that it was:
The high hurdle of the public policy exception is surmounted here by four powerful considerations: (1) the vindication of contractual undertakings and the waiver of sovereign immunity; (2) the repugnancy of retroactive legislation that disrupts contractual expectations; (3) the need to ensure legal claims find a forum; and (4) the prohibition against government expropriation without compensation.
As one commentator put it:
With the [“Pemex”] decision, the Second Circuit joins the District of Columbia Circuit’s longstanding view that annulled arbitral awards are not automatically unenforceable and once again confirmed – in more definitive terms – that while the bar for enforcing an annulled award is high, U.S. courts can and should review the underlying facts of an annulled award sought to be enforced in the United States to determine whether the annulment violated fundamental principles of U.S. public policy.
The full opinion: Corporación Mexicana De Mantenimiento Integral v Pemex‐Exploración Y Producción, __ F. 3d __, ___ WL _________ Case No. 13-4022 (2d Cir., August 2, 2016), the United States Court of Appeals for the Second Circuit
John M. Barkett, Frank Cruz-Alvarez, Sergio E. Pagliery and Marike Paulsson, Second Circuit Affirms Enforcement of $300 Million Annulled Award, August 16, 2016
Vacating an Arbitral Award for “Manifest Disregard of Law”,
This case, Bowers v Northern Two Cayes et al, arises out of a claim for a real estate sales commission and a challenge to the dispute’s arbitration.
In an earlier proceeding in the case, the US District Court for the Western District of North Carolina (Ashville) entered an order compelling the parties to arbitrate their dispute pursuant to their listing agreement’s arbitration clause. Thereafter, an arbitrator was selected and a challenge to the arbitration was presented to the arbitrator. The arbitrator responded to the jurisdictional challenge by sending the parties an email “in which he expressed his opinion that the parties’ agreement called for binding arbitration but that the issue was one that should ultimately be addressed by this Court.” Additionally, he entered an order which was effectively a preliminary injunction, requiring that an amount equal to the commission in dispute be withheld from any sales proceeds and placed in a secure escrow.
The plaintiff, Bowers, thereupon filed two motions with the District Court: a “Motion for Expedited Consideration to Confirm Arbitrator’s Award and Arbitrator’s Opinion that the Arbitration is Binding,” and a “Motion for Confirmation of Arbitrator’s Order of Interim Measures and Issuing of Same Order from the Court.” The Defendants opposed both motions arguing that the arbitrator’s order granting injunctive relief should be vacated, and that “the arbitrator’s order defies the parties’ intention to resolve their disputes via non-binding arbitration.”
The Court initially examined the power of an arbitrator to grant injunctive relief and its own power to review arbitral decisions. On the question of the power to grant injunctive relief, the court quickly resolved that issue: “An arbitrator has the power to grant preliminary injunctive relief, and district courts have the power to confirm and enforce such awards of equitable relief.” [citation omitted]
The Court next set forth its own power of review:
“A district court’s ability to review an arbitrator’s award, . . ‘is severely circumscribed. Indeed, the scope of review of an arbitrator’s valuation decision is among the narrowest known at law because to allow full scrutiny of such awards would frustrate the purpose of having arbitration at all — the quick resolution of disputes and the avoidance of the expense and delay associated with litigation.’ [citation omitted] Thus, a district court may vacate an arbitration award ‘only upon a showing of one of the grounds listed in the Federal Arbitration Act, or if the arbitrator acted in manifest disregard of law.’” [citation omitted]
Lastly, the Court considered what constitutes “manifest disregard of law” and the proof required to evidence such.
The Fourth Circuit has explained that in order for a court to vacate an award on the grounds of the arbitrator’s manifest disregard for the law, the record before the court must show that:
(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle. We note that under this standard, proving manifest disregard require[s] something beyond showing that the arbitrators misconstrued the law, especially given that arbitrators are not required to explain their reasoning.
[citation omitted] A mere error or misapplication of the law is not sufficient grounds for vacating an arbitration award. [citation omitted]The defendants argued that a “manifest disregard of law” existed in the case at bar because the arbitrator “failed to apply the appropriate legal standard for awarding a preliminary injunction.” Additionally, they claimed that during oral argument the arbitrator “declared that he was not bound by the prevailing legal standard for granting preliminary injunctions in fashioning relief under [the arbitration rule applicable to the case].”
The District Court rejected both arguments. With respect to the first, the Court noted that since the interim order was silent regarding the legal standard applied it could not determine what standard had been applied. Significantly, the Court concluded: “[H]owever, the lack of any discussion in that regard cannot reasonably be construed as a ‘refusal to heed’ the applicable legal standard on the part of the arbitrator.”
With respect to claimed statements of the arbitrator, the Court ruled:
[T]he arbitrator’s alleged statements made during oral argument are not part of the record before the Court and thus cannot be considered by the Court in determining whether the arbitrator acted with manifest disregard of the law in fashioning injunctive relief. What is before the Court is the Order for Interim Relief, which reflects the arbitrator’s conclusion “that certain specific interim measures are necessary so as not to frustrate the primary thrust of the arbitration proceeding and the claims by Bowers which are to be adjudicated during the merits hearing of this matter . . . .”
The full opinion: Raymond V. Bowers Northern Two Cayes Company Limited and Lighthouse Reef Resort Ltd., United States District Court for the Western District Of North Carolina, Asheville Division, CIVIL CASE NO. 1:15-cv-00029-MR-DLH